{"id":659,"date":"2014-05-12T16:23:37","date_gmt":"2014-05-12T16:23:37","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=659"},"modified":"2014-05-12T16:23:37","modified_gmt":"2014-05-12T16:23:37","slug":"do-the-dow-industrials-grow-much-more-slowly-than-smaller-competitors-we-examine-20-industries","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=659","title":{"rendered":"Do the Dow Industrials Grow Much More Slowly than Smaller Competitors? We Examine 20 Industries"},"content":{"rendered":"<p>For a growth stock investor like myself, a major challenge is buying companies that <strong>really will <\/strong>grow as fast as Wall Street expects\u2014and sell names that run out of gas before it\u2019s obvious to the market.\u00a0 A major risk is that companies get so big they can no longer grow rapidly because they:<\/p>\n<ul>\n<li>Are battling the law of large numbers.<\/li>\n<li>Already dominate their domestic market, so go overseas where margins are lower (think Wal-Mart in China).<\/li>\n<li>Are too big to manage (JPM\u2019s London Whale).<\/li>\n<li>Make dumb acquisitions that are only profitable for the investment bankers (Pfizer since 1999).<\/li>\n<li>Diversify into a temporarily lucrative but risky ancillary business (GE Capital).<\/li>\n<li>Over-diversify, lose focus, and become a grab bag of mediocre businesses (P&amp;G, J&amp;J for a while).<\/li>\n<\/ul>\n<p>I decided to quantify this risk by comparing the \u201cBiggest\u201d company in various industries with smaller but important competitors (\u201cthe Merely Big\u201d).\u00a0 My methodology is not airtight and would not pass muster at <em>The Journal of Finance<\/em>, but it gets the job done.<\/p>\n<p><strong>Focus on 20 \u201cBiggest\u201d and Compare with 2-6 \u201cMerely Big\u201c In Same Industry<\/strong><\/p>\n<p>To identify the \u201cBiggest\u201d I used 19 of the 30 Dow Industrials (plus Schlumberger) that each had a group of 2-6 smaller competitors in the same industry.\u00a0 For example, I compared CAT with Cummins, Deere, ITW, Joy Global, and Paccar. On average, in the 20 industries studied <strong>the market cap of the \u201cBiggest\u201d was four times the average market cap of the \u201cMerely Big\u201d <\/strong>in that industry.\u00a0 I calculated the 2004-2014E EPS CAGR (compound annual growth rate) of each company, to which I added the current dividend yield to calculate \u201cGrowth+Yield.\u201d\u00a0 (Notice I am looking only at \u201cfundamentals\u201d\u2014not the valuation or price performance of the stock.)\u00a0 So, for example, CAT\u2019s EPS grew from $2.88 in 2004 to $6.23 in 2014, a CAGR of 8%; CAT\u2019s current yield is 2.3%, so its Growth+Yield is 10.3%.\u00a0 That compares with an average Growth+Yield for the five aforementioned \u201cMerely Bigs\u201d of 13.8%.\u00a0 So, in this industry, the \u201cBiggest\u201d (CAT) had a Growth+Yield that was only 75% of the \u201cMerely Bigs\u201d (10.3 \/ 13.8 = 0.75 or 75%).<\/p>\n<p>Again, I performed this analysis for 20 \u201cBiggest\u201d companies in a variety of industries. \u00a0In all the study involves 103 companies with an aggregate market cap of $7.4 trillion, or nearly half the market cap of the entire S&amp;P 500.<\/p>\n<p><strong>The Biggest Lag, but Not By Too Much<\/strong><\/p>\n<p>So, what did I learn? <strong>The \u201cBiggest\u201d usually lag the \u201cMerely Big\u201d but in many cases not by a huge amount<\/strong>.\u00a0 I was impressed that many\u2014though by no means all\u2014giant, dominant, comparatively safe companies were able to keep up with, or nearly keep up with, smaller competitors.\u00a0 Specifically:<\/p>\n<ul>\n<li>In 5 of the 20 industries, the \u201cBiggest\u201d had a <strong>higher<\/strong> Growth+Yield than the \u201cMerely Big\u201d companies it was compared to.\u00a0 In 15 industries it was <strong>lower, but often not much lower<\/strong>.<\/li>\n<li>Comparing Growth+Yield of the \u201cBiggest\u201d with the average Growth+Yield of the \u201cMerely Big\u201d in its industry (a la the 75% figure in the CAT example), the median value for the 20 industries was 87%.\u00a0 (13 of the 20 were above 80%.)\u00a0 This 87% figure means, for example, that if the Growth+Yield return of the \u201cBiggest\u201d was 10%, the average Growth+Yield of the \u201cMerely Bigs\u201d in that industry would be 11.5%.<\/li>\n<li>This result is better than it looks because in most cases the Biggest is considerably less risky than some of the \u201cMerely Bigs\u201d it is compared to.<\/li>\n<li>Shifting from relative to absolute figures, the median Growth+Yield of the 20 \u201cBiggest\u201d was 10.3%&#8211;not bad.<\/li>\n<li>\u00a0As we would expect, the Biggest delivered a higher proportion of Growth+Yield via dividend yield as opposed to earnings growth. For the typical (median) company, the dividend yield was 37% higher for the Biggest than for the Merely Bigs in the same industry.<\/li>\n<\/ul>\n<p><strong>From Fundamentals to Stock Price: Beware the Street\u2019s Love Affair with the Biggest<\/strong><\/p>\n<p>Though there were a few disasters like PFE and GE (see below), overall the Biggest did better than I expected.\u00a0 But keep in mind that we are talking here about \u201cfundamentals\u201d (EPS growth and dividend yield) NOT valuation and stock price performance.\u00a0 If you pay too much for the \u201cBiggest\u201d company <strong>it can be a bad stock even though the earnings growth remains fairly strong<\/strong>.\u00a0 This is true, for example, of MSFT, KO and INTC, which are still trading below their peaks of 1998-2000.<\/p>\n<p>Obviously if you pay for 15% secular growth in a stock and it turns out to be only 10%, price performance will be poor.\u00a0 Psychologically and analytically, <strong>it is extremely difficult to figure out if and when the growth of an industry leader such as Coke or Microsoft will decelerate.<\/strong>\u00a0 And, frankly, Wall Street tends to do a poor job here, for a few reasons:<\/p>\n<ul>\n<li>By definition, these have been great stocks that have trampled the bears for years.\u00a0 (I remember an analyst who was bearish on MSFT in the mid-1980s, until the stock gave him a nervous breakdown and he left Wall Street.)<\/li>\n<li>Analysts may not be eager to downgrade a popular stock that all their clients own in size.<\/li>\n<li>Every analyst needs some stocks rated \u201cBuy,\u201d partly because they have clients that must have an investment in the industry and want to know, \u201cWhat\u2019s your top pick in the space?\u201d\u2014even if the space is not attractive.\u00a0 A\u00a0 good example is Big Pharma over the past 10 years.<\/li>\n<li>When EPS growth slows, analysts are prone to maintain a \u201cBuy\u201d and tell clients, \u201cThe stock is cheap.\u00a0 The PE ratio relative to the S&amp;P 500 is well below historical norms.\u201d This is a dumb observation if the multiple is declining because growth is slowing.<\/li>\n<li>Finally, and oddly, the Street does not do a great job of spotting secular trends that hurt growth\u2014such as Coca-Cola being hurt by the aging and increasing health consciousness of\u00a0 consumers; big pharma failing to replace revenue lost to patent expirations; big banks being hurt by harsh regulations since 2009; or paper, newspaper, office products retailers, and PC printing companies being hurt by the shift to the mobile web.<\/li>\n<\/ul>\n<p><strong>A Look at the Twenty Stocks, from Best to Worst<\/strong><\/p>\n<p><strong>Methodological note<\/strong>:\u00a0 When reading about individual stocks, one should not put excessive weight on the 2004-2014 EPS CAGR and \u201cGrowth+Yield\u201d because <strong>CAGR\u2019s are sensitive to end points<\/strong>.\u00a0 If a company had a bad year in 2004 and\/or a particularly good year in 2014, this would flatter the growth rate. The converse is also true.\u00a0\u00a0 Also, investing is always about the future; past growth may not be sustainable.\u00a0 On this score, it is reassuring that the average 2014 EPS growth rate of the 20 \u201cBiggest\u201d is 7.6%; their current average dividend yield is 2.7%<\/p>\n<p><strong>JP Morgan<\/strong>:\u00a0 At 9.8%, its Growth+Yield was not particularly high on an absolute basis, but it was 242% of the average of the \u201cMerely Big\u201d (USB, PNC, STI, BK, FITB, STT) some of which were clobbered by the financial crisis.<\/p>\n<p><strong>Travelers<\/strong>:\u00a0 A high Growth+Yield of 16.5%, which was 228% of the Merely Bigs (CB, ALL, MMC, PFG).<\/p>\n<p><strong>Exxon-Mobil<\/strong> had a decent Growth+Yield of 9.8%, which was actually 160% of the average of the Merely Big (APA, APC, OXY, DVN).<\/p>\n<p><strong>Boeing<\/strong>:\u00a0 A duopoly is a wonderful thing, and BA benefits from Asia\u2019s travel explosion.\u00a0 BA had a very high Growth+Yield of 19%, or 122% of the average of the Merely Bigs (GD, LMT, NOC, RTN).<\/p>\n<p><strong>Coca-Cola<\/strong>:\u00a0 Its 10.3% Growth+Yield was 108% of the average of the Merely Bigs (PEP, GIS, K and HSY).\u00a0 In this industry the Growth+Yield was remarkably uniform across the five companies, ranging from 9.2% to 10.3%.<\/p>\n<p><strong>Wal-Mart\u2019s\u00a0 <\/strong>Growth+Yield was 10.6%, 97% of the average of the Merely Bigs (COST, TGT, KSS, M, KR). Saturation and Amazon are big challenges in the future.\u00a0 Also, retailing is rather difficult to take abroad successfully.<\/p>\n<p><strong>IBM<\/strong>:\u00a0 Its Growth+Yield was high at 15.8%, which was 96% of the peers (Accenture, HPQ, ORCL).<\/p>\n<p><strong>Schlumberge<\/strong>r\u2019s Growth +Yield was very high at 20.1%, 96% of the average of HAL and BHI.\u00a0 This is an underappreciated \u201chigh tech industry\u201d that oil producers around the world\u2014whether private or state-owned companies\u2014need.\u00a0 Admittedly it is more risky than oil producers because it is leveraged to capital spending, not oil and gas output and price.<\/p>\n<p><strong>Microsoft<\/strong>: Growth+Yield of 12.8%, 92% of the average of ADBE, GOOG, INTU, ADSK.<\/p>\n<p><strong>United Health<\/strong> had a decent Growth+Yield of 12.4%, 88% of the average of WLP, AET, CI and HUM.<\/p>\n<p><strong>McDonald<\/strong>\u2019s has a solid Growth+Yield of 14.7%, 86% of the average of fast-growing SBUX and YUM.\u00a0 Whether MCD can keep growing rapidly is far from clear, given saturation, tough competition, and being locked into a \u201cnot very good for you\u201d menu by its kitchen configuration.\u00a0 Plus, Obamanomics continues to hurt MCD\u2019s low-income customer base.<\/p>\n<p><strong>AT&amp;T<\/strong> has a Growth+Yield of 11.5%, 85% of the average of CMCSA, DISH, DTV, AND TWC.<\/p>\n<p><strong>JNJ<\/strong> has a decent Growth+Yield of 9.4%, 81% of the average of BAX, MDT, and BDX.\u00a0 After a period of severe mismanagement of its consumer business, JNJ\u2019s organic growth is picking up thanks to a new CEO and a rollout of successful new drugs (which, to be fair, were initially developed under the prior CEO).<\/p>\n<p><strong>P&amp;G<\/strong> has a decent Growth+Yield of 9.2%, but it is only 76% of the average of CL, CHD, EL, CLX, and KMB.<\/p>\n<p><strong>Caterpillar<\/strong>, as mentioned, had a Growth+Yield of 10.3%, 75% of its peer group.<\/p>\n<p><strong>American Express<\/strong> has a Growth+Yield of 8.2%, which is 67% of the Mergely Bigs (COF, DFS, AMP, and TROW).\u00a0 However, AXP is a fundamentally safer stock than some of its peers.<\/p>\n<p><strong>Intel<\/strong> has a Growth+Yield of 8.4%, which is only 61% of the merely big (QCOM, SNDK, ADI, TXN).\u00a0 INTC missed the boat on the shift from PC\u2019s to smart phones and tablets and now has a smaller market cap than QCOM.\u00a0 However, as the world\u2019s best designer and builder of chips it remains very competitive long term.<\/p>\n<p><strong>DuPont<\/strong>\u2019s Growth+Yield was 8.8%, which is not too bad in absolute terms but just 61% of the merely big (DOW, PPG, PX, APD, EMN, MON).\u00a0 DD is streamlining to improve its growth rate.<\/p>\n<p><strong>Pfizer<\/strong>:\u00a0 a low Growth+Yield of just 4.0%, 50% of the average of MRK, LLY, BMY, and AMGN.\u00a0 Amgen has grown EPS at a 14% clip, versus just 1.8% for the four Big Pharma names.\u00a0 PFE\u2019s sudden shift from restructuring mode to another giant deal (buying AstraZeneca) suggests its organic growth prospects are poor.<\/p>\n<p><strong>GE<\/strong> had a dreadful Growth+Yield of just 3.8%, 31% of the average Merely Big (UTX, HON, ETN, DHR, EMR, ITW).\u00a0 Mr. Immelt has done his best, but the company was clobbered by the financial crisis and has a too big to manage problem.\u00a0 A smart analyst once told me it would be impossible to find a CEO who could effectively manage GE\u2019s disparate parts.<\/p>\n<p><strong>Selected Mega-caps Are a Decent Investment<\/strong><\/p>\n<p>The average PE ratio of these 20 stocks on 2014 EPS is 15.1x\u2014very reasonable in a low-rate environment.\u00a0 Investors get a 2.7% current yield plus growth of 5-10% per year, in most cases.\u00a0 Yes, the quoted price of the shares will fluctuate.\u00a0 But you own some of the biggest and best companies in the world.\u00a0 It is strange that, at a time when pundits are complaining about how capitalism creates inequality as the rich get richer, investors are lukewarm on owning shares of\u00a0big, successful companies.\u00a0 The 20 stocks discussed here are a sample, not a portfolio, and <strong>there are names on the list I definitely would not own<\/strong>.\u00a0 Consult your investment advisor or do your own work.<\/p>\n<p>Copyright Thomas Doerflinger 2014.\u00a0 All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For a growth stock investor like myself, a major challenge is buying companies that really will grow as fast as Wall Street expects\u2014and sell names that run out of gas before it\u2019s obvious to the market.\u00a0 A major risk is &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=659\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[339,340,105,338,8],"class_list":["post-659","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-dow-jones-industrials","tag-earnings-growth-rates","tag-growth-stocks","tag-mega-caps","tag-stock-market"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/659","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=659"}],"version-history":[{"count":2,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/659\/revisions"}],"predecessor-version":[{"id":661,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/659\/revisions\/661"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=659"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=659"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=659"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}